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The Labour Market Effects of Payroll Taxes in a Middle-Income Country: Evidence from Colombia

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  • Kugler, Adriana D.
  • Kugler, Maurice

Abstract

We use a panel of manufacturing plants from Colombia to analyse how the rise in payroll tax rates over the 1980s and 1990s affected the labour market. Our estimates indicate that formal wages fall by between 1.4% and 2.3% as a result of a 10% rise in payroll taxes. This ‘less-than-full-shifting’ is likely to be the result of weak linkages between benefits and taxes and the presence of downward wage rigidities induced by a binding minimum wage in Colombia. Because the costs of taxation are only partly shifted from employers to employees, employment should also fall. Our results indicate that a 10% increase in payroll taxes lowered formal employment by between 4% and 5%. In addition, we find less shifting and larger disemployment effects for production than non-production workers. These results suggest that policies aimed at boosting the relative demand of low-skill workers by reducing social security taxes on those with low earnings may be effective in a country like Colombia, especially if tax cuts are targeted to indirect benefits.

Suggested Citation

  • Kugler, Adriana D. & Kugler, Maurice, 2003. "The Labour Market Effects of Payroll Taxes in a Middle-Income Country: Evidence from Colombia," CEPR Discussion Papers 4046, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:4046
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    More about this item

    Keywords

    minimum wages; payroll taxes; shifting; wage rigidity;
    All these keywords.

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions

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